Wealth Insights

You got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away, know when to run

Much of the strong performance by the stock market in the first quarter was driven by two things: First, the adoption by the Federal Reserve of a “wait and see” approach with regard to raising interest rates. Secondly, an expectation that the United States and China would amicably resolve their trade disputes without additional tariffs. A Reuters report that China has suddenly backtracked on nearly every aspect of the deal, and a tweet by President Trump over the weekend that tariffs would go to 25% on nearly all Chinese imports by Friday sent the stock market lower.

Don Straszheim at Evercore ISI thinks the likelihood that the U.S. imposes all the threatened tariffs Friday is less than 50 percent, given talks between Vice-Premier Liu He and U.S. officials, but risk, including a partial tariff escalation remain elevated.

The sticking points are both substantive – how far the U.S. can expect structural reforms that change China’s basic business model – and political – how to reconcile Trump’s need for a “win” that prevents him from being outflanked on China with Premier Xi’s need to present all changes as taking place on China’s terms. If tariffs are stepped up on Friday, we expect China retaliates, but talks resume quickly. This reflects Trump’s desire for a strong economy heading into 202 and Xi’s interest in defusing near-term tension and returning to China’s longer term strategy of waiting Trump out and hoping for a better outcome (from China’s perspective) from the next election.

Cornerstone Macro lays out several possible scenarios for trade talks with China:

Deal

No deal, making progress, no tariff increase

No deal, making progress, tariffs go up to 25%

No deal, no progress, tariffs go up to 25%

Talks suspended, tariffs go up to 25%

Cornerstone believes number 3 is the most likely outcome, because China won’t budge on the issues of Intellectual Property, Joint Venturing and Forced Technology Transfer. The president only “wins” if there is no deal, or if there is a strong deal. Trump will probably not accept a weak deal.

You may not be looking for the promised land
But you might find it anyway
Under one of those old familiar names

A CNBC report recently noted that Millennials are pouring into these smaller cities and buying homes. Of particular note, Madison, Wisconsin and Grand Rapids, Michigan headed the list, with good jobs and affordability of quality housing. Christopher Ziegler, a real estate agent at Redfin, has seen the makeup of Madison change dramatically in a very short period of time. “It is surprising to see this city grow into what it has become, but it’s starting to make more and more sense just because of all of the tech jobs that we’re offering, the UW campus that we have, and just the amazing culture,” said Ziegler. “I’ve had an influx of millennials moving into the area in the past year or so, and it’s because everything on the coast where they’re currently living, it’s starting to become more unaffordable.” Old National has been very pleased to partner with great people and great banking franchises in both Grand Rapids and Madison. We are excited to be in both of these growth markets.

We would note that home price appreciation is slowing nationwide. The CoreLogic Home Price Index shows home prices increased 1% in March or 3.7% year over year. Moody’s Analytics observes this is the 12th straight month of slowing year-over-year growth. As the housing market recovery peaked, home price appreciation outpaced normal wage growth and affordability became a real issue for many first-time homebuyers. New-home sales have risen sharply recently thanks to more attractive pricing driven in part by relief from new-home supply. New-home prices are down 10% year over year, and they are now only 15% more expensive than existing homes, on average. This cost reduction will soon spill over into the existing-home market, with potential homebuyers starting to substitute new homes for existing ones because of the smallest price premium in more than a decade. Consequently, there is a possibility that the deceleration in existing-home price growth could intensify, at least temporarily.

“The reality is that business and investment spending are the true leading indicators of the economy and the stock market. If you want to know where the stock market is headed, forget about consumer spending and retail sales figures. Look to business spending, price inflation, interest rates, and productivity gains.” Mark Skousen – American economist

Our own Senior Economist and Ph.D., Don Molé, has provided this week’s economic writeup: U.S. economy grows above expectations in the first quarter. Don points out that although 1st quarter GDP growth of 3.2% was better than expected, there are one-time factors built in that make this pace of growth unsustainable.

Interested in receiving more investment and economic insights?

Sign up to receive weekly portfolio manager meeting notes, our quarterly economic outlook or occasional emails related to current financial news. You can select which emails you want to receive and unsubscribe at any time.

*Song Credits:
The Gambler - Kenny Rogers
Living in America - James Brown

Matt has over 25 years of experience in the trust and investment management industry. He is responsible for the company's economic outlook, asset allocation guidance and portfolio management team. In addition to his other responsibilities Matt serves on the Old National Wealth Management Executive Leadership Group, responsible for directing the activities of the organization at its highest level. Matt holds the Chartered Financial Analyst®designation and is a member of the CFA Institute®.

Investment instruments utilized by Old National Wealth Management are not FDIC insured, are not deposits or other obligations of Old National Wealth Management, Old National Bank, its parent company or affiliates, and involve investment risk including the possible loss of principal invested.

Investment and securities information presented herein is unique to Old National Wealth Management's approach to investment management. All information and opinions have been obtained from sources believed to be reliable and current at the time of publication, but are not guaranteed and do not claim to be a complete statement of all material factors. Examples or other representations made herein are for illustrative purposes and are not intended to be specific legal, tax, or investment advice and do not represent a solicitation.

Investments and strategies that may be presented may not be suitable for all investors. Old National Wealth Management Client Advisors and Portfolio Managers will work with interested parties to execute plans developed in consultation with their attorney or tax advisor.

The comments, views and opinions expressed herein are those of the author and Old National Wealth Management. From time-to-time, Old National Bancorp affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Old National Bancorp and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.